S&P 500 price analysis: will SPX break the ascending channel?
14:13, 21 December 2021
The S&P 500 Index (US 500) has risen more than 20% since the start of the year, but there were more negative than positive sessions so far in December, drawing investors’ focus back to the index's valuations and technical levels.
Analysts have begun to downgrade their growth estimates for the US economy as a result of the fast spread of the Omicron variant as well as the end of the pandemic policy stimulus, with the US Federal Reserve’s shifting toward a more hawkish stance on inflation.
Key stock market metrics now indicate that the S&P 500 hasn’t been so overvalued as it is now since the dot-com bubble era.
Technically, the S&P 500 is testing the support of the ascending channel in which it has been trading since November 2020. The break of the bullish channel to the downside might increase the likelihood of the index retracing to 4,370-4,400, where it would find a new support by the 200-day moving average. As an alternative scenario, the index could rebound on support at 4,460, in response to buy-on-dip attempts following a 4.5% decline from its highs.
S&P 500 fundamental analysis – December 2021
Several key stock market fundamental metrics indicate that the S&P 500 is overvalued:
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- The S&P 500’s Price to Earnings ratio is at 38.0, 90% higher (or 2.3 standard deviation above) than its long-term average. The last time the price-to-earnings (P/E) ratio of the S&P 500 exceeded its average by more than two standard deviations was during the dot-com bubble.
S&P 500 P/E ratio vs historical average – Credit: Currentmarketvaluation.com- Mean-reversion metrics show that the S&P 500 is 74% above its modern era trend line, similar to the value it held during the early 2000s.
S&P 500 mean-regression – detrended – Credit: Currentmarketvaluation.com- According to the renowned Warren Buffet Indicator, the overall US stock market capitalisation reached 213% of gross domestic product (GDP), the highest level in history and 66% above the long-term average.
Buffet Indicator: Composite US stock market value to GDP – Credit: Currentmarketvaluation.com- Since the low of March 2020, the S&P 500 has doubled in price, mirroring the Fed’s balance sheet expansion, which increased to $8.8trn from $4.4trn, indicating that liquidity injections have been among the major drivers behind the S&P 500’s pandemic rally.
S&P 500 vs Federal Reserve balance sheet – Credit: TradingviewS&P 500 technical analysis – 21 December 2021
In recent weeks, the S&P 500 has repeatedly been testing the bottom line of the ascending channel, which has been in place since November 2020, and has failed to break through it.
The 50-day moving average, which is hovering around 4,462, is currently trading in line with the index’s recent highs, while the 200-day is trading roughly 5% lower.
The breakdown of the bullish channel to the downside might raise the probability of the index retracing to 4,370-4,400, where it would find new support from the 200-day moving average.
Alternatively, the index might bounce off support at 4,460 in reaction to buy-on-dip attempts following a 4.5% drawback from its all-time highs.
S&P 500 technical analysis as of 21 December 2021 – Credit: Capital.comBefore investing in any asset, it is important that you always do your own research or contact your financial adviser before arriving at a decision. Remember that your decision should be based on your attitude to risk, your expertise in this market, the spread of your portfolio and how comfortable you feel about losing money. Never invest more than you can afford to lose and keep in mind that past performance is no guarantee of future returns.
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